Activision-Blizzard’s Next Billion Dollar Title Won't Cost Gamers a Dime

Activision-Blizzard's next megahit could be free-to-play, but it won't be like one of Zynga's games.

May 25, 2014 at 11:00AM

Activision-Blizzard's (NASDAQ:ATVI) next megahit may come as a shock to some investors. Destiny, and the next entry in the Call of Duty franchise, should do well, and sell millions, but the hidden gem in Activision's pipeline is likely to be a game few are familiar with.

Heroes of the Storm, an upcoming MOBA (multiplayer online battle arena), could emerge as Activision's next great cash cow, generating a steady stream of revenue despite being offered to its players on a free-to-play basis. Unlike other free-to-play games, the sort that have been championed by firms like Zynga (NASDAQ:ZNGA), Heroes of the Storm could have long-term staying power.

The MOBA phenomenon
As video game technology has progressed, new genres have periodically arisen: Fighters, popular in arcades, gave way to platformers, well-suited to early consoles; 3D graphics and Internet-connected boxes led to the rise of first-person shooters; broadband Internet connections allowed massively multiplayer online games like Activision's World of Warcraft to flourish; smart devices and social networks facilitated social games like Zynga's Farmville and Words with Friends.

Will the MOBA emerge as the next great video game genre? There's plenty of reasons to believe so.

In fact, to some extent, it already has. League of Legends and Dota 2, two of the most popular video games in the entire world, are MOBAs. With 7.86 million players, Dota 2 is more popular than Activision's World of Warcraft. That may sound impressive, but League of Legends is larger than Dota 2 by a factor of 9 -- its player base is truly staggering, with almost 67 million players (greater than the population of France, the U.K. and South Korea).

These numbers may not be well-known to investors, as both games are largely outside the purview of the U.S. market. Chinese giant Tencent owns League of Legends, while Dota 2 is owned by Valve, a private company. That makes exact financial performance difficult to gauge, but according to SuperData Research (via VentureBeat), Dota 2 brought in $80 million last year -- League of Legends made $624 million.

A different sort of free-to-play
That money was made without any mandatory fees or monthly subscriptions -- unlike most traditional video games, Dota 2 and League of Legends are completely free to play. Rather than make money with an upfront fee, developers allow players to purchase special in-game items for a few dollars. With such a massive player base, those purchases add up.

Investors, then, may be inclined to lump these games in with other free-to-play titles -- another Farmville or Draw Something. However, to do so would be a mistake.

Zynga's struggles have largely been a byproduct of the cyclical nature of its titles. In 2012, Zynga acquired developer OMGPOP for $200 million. At the time, OMGPOP's biggest game, Draw Something, was extremely popular, and Zynga appeared to be wisely acquiring a potential competitor. Unfortunately, the deal turned out to be a tremendous blunder -- Draw Something's popularity rapidly faded, and Zynga was forced to write off much of the purchase price.

But MOBAs are different. Although they're free to play, they are far from simple, and do not appeal to the sort of casual audience that Zynga's titles have thrived on. In fact, they may be the most core of core video game titles; the closest a video game has yet come to being considered a sport.

There have been League of Legends tournaments with $5 million cash prizes, and it is, by far, the most commonly streamed title on Twitch (Dota 2 comes in second place). The games are global phenomenon -- the two are the most popular games in China.

Activision's opportunity
Activision's Heroes of the Storm is a game in the same mold as League of Legends and Dota 2 -- a free-to-play PC title with comparable gameplay. With no set release date, and no critic reviews, there's no guarantee that the game will be a success.

But the opportunity is monstrous, and I believe deeply underappreciated. Although games like Destiny, World of Warcraft and Call of Duty will continue to be of the utmost importance to Activision in the near-term, long-term shareholders should keep a close eye on Heroes' development -- if the popularity of other MOBAs is any indication, Heroes could become the most popular game Activision has ever released.

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Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard. The Motley Fool owns shares of Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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